Footnote to the iron ore story

As a ‘footnote’ to our earlier post (though we are sure it will not be the final word), on April 2 the FT paper carried a story saying that prices of oil (and other commodities) “surged on Thursday, with oil hitting a fresh 18-month high of $85 a barrel, and copper and iron ore posting multi-month peaks bolstered by signs of strong growth in manufacturing across the world, particularly in China”.

“The rise in oil prices – 75 per cent over the past year – is starting to worry some policymakers. … “Concern is shifting toward the possibility of a sharp price rise that could derail the nascent economic recovery”.

“Spot iron ore surged to a fresh 18-month high.”

“Analysts warned that the surge in base metals was likely to entice some miners to reactivate idle production, particularly in markets such as nickel.”

“Some analysts said that investors’ flows at the start of the second quarter were also propelling commodities higher.”

Under the pre-existing system for buying and selling iron ore, prices were fixed for a year. Short term fluctuations came and went, smoothed out in negotiations that took months to complete. Buyers knew how much their steel was going to make, and bridge builders, ship builders, tin can manufacturers, knew how much their goods would need to sell for. Miners knew which mines would stay open, and which would close. Under the new system, miners make much more profit ($5bn estimated for the top three this year). But ultimately the rest of us pay for that profit, in higher prices for goods made and transported and stored using steel, and in higher volatility, uncertainty and stress.